InvestorQ : Why is the RBI unhappy with the state of digital lending in India and why has it expressed concerns over digital lenders?
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Why is the RBI unhappy with the state of digital lending in India and why has it expressed concerns over digital lenders?

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Juvina Maggie answered.
2 months ago
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Digital lending has picked up in India in a big way in the recent past. It entails online lenders doing some basic checks of the customer and giving them loans over the internet or through apps. One of the concerns is that these digital lenders operate as banks without being regulated as banks and that has been one of the major concerns that RBI has had.

A major issue in the entire story is the rates of lending. Normally, the rates tend to be quite usurious as there is no oversight. It is almost like the old money lending system being replaced with a digital alternative. The digital loans are lent at high rates of 25% to 30% per year and still higher if credit rating is low. RBI worries that people are not aware.

It has happened quite often that people get into this kind of steep debt and end up in a debt trap. In a sense, this starts off as a small problem and could eventually become a systemic problem, which is what the RBI wants to regulate. RBI wants to especially avoid this situation at a time when rates are falling as it could have a cascading effect.

The second areas of concern for the RBI are the typical strong arm tactics used by recovery agents. Such aggressive methods have come in for a lot of criticism. Digital lending, being a high risk business, is done with quick background checks and zero collateral. Lenders are left with no choice but use strong arm tactics, especially with wilful defaulters and skippers.

RBI wants to regulate these tactics with a mixed approach of regulation and self-regulation model. Quite often, large banks and NBFCs outsource their small ticket lending activities to these digital platforms. RBI has now made it clear that such rules will apply irrespective of whether the activity collection of debts is done in-house or is outsourced.

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